Corrections are never pleasant. They are part of the market process to determine "price discovery" – which is when a willing buyer and a willing seller agree on a price and a trade occurs. The market experienced phenomenal growth from the March 23 low to the September 2 high without a correction. That torrid pace was 56.66% over a 5 and 1/3 month period. Clearly this an unsustainable pace but not necessarily the end of the bullish run.
A correction is a way of bringing some sobering reality to an overly speculative market. However, it does not necessarily mean that the bull is over and a bear market is beginning. The fundamentals that drive the stock prices upward are the ultimate key to the sustainability. These fundamentals at this time remain strong. Job creation has been very powerful with over 10 million jobs created in the last four months and the unemployment rate falling to 8.4% according to BLS (Bureau of Labor Statistics).
The New York Fed (Federal Reserve Bank of New York) has forecast a GDP (Gross Domestic Product) growth rate of 15.6% for the third quarter - on an annualized basis, and the Atlanta Fed has forecast a 29.6% rate of growth. In either case a very robust recovery. Other factors include strong corporate earnings, the probability of a Covid-19 vaccine by the end of the year or early 2021 and the possibility that the two political parties will come to terms on a stimulus package. Consequently, the bullish case has some strong arguments, but only time will unfold the actual story.
Now, the 800 pound gorilla in the room is the election. At this point the market does not seem to be trading on this potentially enormous event. Should that change, we have developed a strategy for dealing with a dramatic shift in the tax and regulatory policies environment. However at this time economics is still ruling the markets, so we do not want to interfere. Please contact us with any questions or concerns.
Terry E. Nager , CFP ® , ChFC ® , CLU ®